Citi, Goldman, ICAP And Others Prepare For Grexit... Again

Tyler Durden's picture

Every couple of years the same identical European drill repeats itself: 1) Greece makes loud noises as it approaches an election, 2) Europe says it couldn't care what the outcome is and that Greece should stay in the Euro but if it exits it won't be a disaster, 3) the ECB reminds everyone of the lie that it is not preparing for Plan B (it is) despite holding on to over €100 billion in "credibility-crushing" Greek bonds, 4) panicking Greek banks say the deposit outflow situation is completely under control (adding that "The Bank of Greece along with the European Central Bank are monitoring closely the developments and intervene whenever this is necessary," which is code word for far more familiar, five-letter word), and meanwhile 5) all non-Greek banks quietly start preparing for the worst case scenario.

So far this time around, we had everything but step "5". We do now.

According to the WSJ, "banks and other financial institutions in Europe are stress-testing their internal systems and dusting off two-year-old contingency plans for the possibility Greece could leave the region’s monetary union after a key election later this month. Among the firms running through drills are Citigroup Inc., Goldman Sachs Group Inc. and brokerage ICAP PLC, according to people familiar with the matter."

And soon enough Bloomberg, because who can possibly forget the mysterious appearance of the "XGD Crncy" in June of 2012, only to disappear moments later after a few hurried phone calls from Frankfurt...

But back to the banks: "The firms’ plans include detailed checks on counterparties that could be significantly affected by a Greek exit, looking at credit exposures and testing how they would provide cross-border funding to local operations."

Some firms are also preparing for the impact on payment systems and conducting trial runs of currency-trading platforms to see how they would cope with adding a new Greek currency or dealing with potential capital controls.


The moves come as Greek leftist opposition party Syriza continues to lead in recent public opinion polls ahead of national elections on Jan. 25. The ruling coalition government has framed the election as a de facto poll on whether the country stays in the eurozone, saying Syriza’s antiausterity policies would force a break with eurozone partners. Syriza, though, hasn’t campaigned on an exit and most Greek voters want to stay in the monetary union, according to recent polls.

Summarizing Europe's only strategy for the past 5 years is Frederic Ponzo, managing partner at consultancy Grey Spark: "Hope for the best, plan for the worst."

At some European banks, that currently means dusting off plans drawn up a couple of years ago, when a eurozone breakup was a hot topic. In 2011 and 2012, banks, brokers and companies with significant exposure to Greek assets put in place contingency plans to minimize the fallout from a breakup.

Which is smart, because absolutely nothing has changed in Europe where not even "Mr. ECB Chairman got to work" but merely verbally hypnotized the bond vigilantes into a state of paralysis, and as a result, nothing at all has been fixed, aside from the idiotic low yields on European bonds all of which have been bought to ridiculous levels on what is now a 3 years frontrunning of an ECB action that has been three years in the coming, and which many say will never actually arrive: the outright - and illegal according to Article 123 - monetization of European sovereign debt across the board.

It goes without saying that should the worst case scenario take place, the immediate question is who is next, and will the "XIL" be the next ticker everyone eagerly awaits:

The head of currencies trading at a large European bank said that reintroducing the Greek drachma to its trading system wouldn’t be too difficult, but dealing with a larger breakup would be more challenging.


“Italy could follow Greece’s steps if the exit will prove successful in providing some relief to the country’s economic crisis,” he said.

Italy... or Spain. Earlier today we got news that Spain's own equivalent of Syriza is surging in the polls and has left the ruling socialist party in the dust: "A poll published on Sunday showed that leftist up start Podemos was again in the lead to winSpain's next general election, which could result in the formation of party pacts, or even the country's first coalition government."

The Metroscopia poll of 1000 people, published in the left-leaning newspaper El Pais, showed one-year-old Podemos (We Can) would take 28.2 percent of the vote, up from 25 percent in December when it fell back to second place behind the Socialists. Podemos stood at 10.7 percent of the vote when it was first included last August.

So assuming Europe survives the Greek election in 2 weeks it has a Spanish redux to look forward to in less than 12 months:

Spain has a general election due by the end of the year and a regional and municipal election expected in May. Most of those who told Metroscopia they would vote for Podemos said they believed Spain needed to get rid of its two-party system.

If only Americans shared the same sentiment.

And yet while democracy has always been the Achilles heel in Europe's artificial political and monetary construct which works in an ideal world dominated by technocrats, it is not even the Greek, or Spanish, elections that may be the biggest risk.

As Reuters also reminds us, a "landmark" legal opinion this week will remind the European Central Bank as soon as Wednesday of the limits it faces as it advances towards money printing. With expectations high that the ECB is on the verge of buying government bonds with new money to shore up the economy, an influential adviser to Europe's top court will give his view on Jan. 14 about an earlier unused bond-buying scheme.

"It is the latest chapter in a long-running and increasingly bitter dispute about quantitative easing (QE) between the ECB and Germany, the largest member of the 19-country bloc, that is likely to limit the size or scope of such a program. As the debate continues, the euro zone economy is all but grinding to a halt. Germany is expected to announce modest growth on Jan. 15 for last year."

Here is how SocGen summarizes the threats from just the European Court of Justice decision this week, and its potential downstream affects:

“Whatever it takes”. This was the promise made by ECB President Draghi on 26 July 2012 and cemented by the OMT on 6 September 2012. Since then, market participants have placed their faith in this promise. On 12 September 2012, the German Federal Constitutional Court (GFCC) announced it would examine whether the OMT is an ultra vires act stretching beyond the limits established by the German Act approving the ESM (link to decision here).


A still lengthy process ahead, but the GFCC will have the final say: Fast forward to 7 February 2014 when the GFCC delivered its decision on the OMT (link here), referring the case to the European Court of Justice (ECJ) for a preliminary ruling (for more on the  process click here), but maintaining that in case of an ultra vires act, the GFCC is competent to rule on the constitutionality of the OMT. The next key date is 14 January, when Advocate General Cruz Villalón delivers his opinion in the case (link to ECJ proceedings here). A final ruling from the ECJ will follow only months later, and the Advocate General’s opinion does not have to be followed. Only then will the GFCC give its final ruling and it may, by then, well be 2016.


If the OMT is not adapted, the GFCC is very likely to reject it: The GFCC decision already concluded that the OMT in its current form exceeds the ECB’s mandate, by encroaching upon the responsibility of the Member States for economic policy, and by being incompatible with the prohibition of monetary financing. The GFCC also suggested a possible interpretation in conformity with Union Law. In essence, it identifies three points to address.


1. Introduce a maximum limit on OMT purchases: In presenting OMT, the ECB declared it “unlimited”. In statements submitted to the GFCC, however, the ECB noted that given that OMT can only buy debt with a maturity of up to 3 years, this de facto sets a maximum of €524bn (for Italy, Spain, Portugal and Ireland). The GFCC is nonetheless concerned that this “implicit” limitation could easily be circumvented by increased sovereign issuance on shorter maturities. 


SG view: Introducing an explicit limit on the potential size of OMT is likely to address  GFCC concerns on “unlimited”. A limit of €500bn is, in our opinion, unlikely to trigger significant market concerns as this would still leave the OMT well armed to offer targeted support to a member states under an eventual ESM program. 


2. Set a locking period around issuance: The GFCC flagged the potentially blurred line between purchases in primary and secondary markets. The former is prohibited under the Treaty while the latter is allowed. In its statements, the ECB noted that a locking period will be determined in a guideline, but not published. 


SG view: A clear commitment to a locking period should suffice on this point. 


3. Limit pari passu: A key strength of OMT is the promise to be pari passu with private investors in the event of a debt restructuring. In its statements to the GFCC, the ECB claimed that liability risk to national budgets is minimised by sufficient risk prevention, but added that should losses nonetheless occur they could be carried forward and balanced with revenues in the following years. The Bundesbank in its statements disagreed, noting every loss that it incurs burdens the German federal budget. The GFCC support this view highlighting that “the possibility of a debt cut must be excluded”.


SG view: To our minds, the pari passu status of the OMT is unlikely to survive the various court proceedings, marking a blow to Draghi’s “whatever it takes” promise and increasing loss-given-default for private investors. Note, that the decision by the GFCC on the ESM excludes the possibility of the ESM assuming OMT credit risk as this would de facto leverage the mechanism. To change this, the ESM Treaty would need to be renegotiated, with all the complications that this would entail.


Somewhat surprisingly, the GFCC decision had essentially no market impact when it was released back in February. Market faith in euro area government’s efforts to deliver growth and sustainable public finances offers one possible explanation. Given significant fears on sustained lowflation, we believe that more recently it is the promise of a large sovereign QE program that offers support to market confidence.

None of the above is even remotely influenced by the subsequent Greek elections and the ECB's potential QE announcement on January 22 (which SocGen summarizes as follows: "QE unlikely to be both large scale and pari passu").

For simplicity's sake, here is the full calendar of risk events in just the next 2 weeks, any single one of which has the potential to send the market soaring... or crashing.

In short: New Drachma or not, the European doldrums are over. We hope that everyone enjoyed them while the lasted. Up next: deja vu Eurosis, all over again.

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Spitzer's picture

Any new news on Draghi resigning yet ?

Please resign you keynesian WOP Goldman scum.

Tao 4 the Show's picture

Yes, Grexit again, but we are in a new era. Obviously, social unrest in Europe is being fomented. Good to pause and ask why. An end in itself, a distraction from other, more important events, or preparation for bigger events?

Looney's picture

With all this Grexit brouhaha (which will amount to grexactly ZERO, un-effing-fortunately) the Eurozone WILL break up, but not because of Greece.

The “Domino Effect” will start with… drumroll!!!... Ukraine’s default - EU's newest BFF  ;-)


Dead Canary's picture

Correct. Black Swans always come out of nowhere. If you see them coming, they don't arrive.

ZH Snob's picture

the greeks should leave the EU, go back to drachmas and talk with the BRICS about their future.

Seize Mars's picture

ICAP is preparing for nothing other than getting drunk and stoned this weekend.

Shitgum Suicide's picture
Shitgum Suicide (not verified) Jan 11, 2015 5:11 PM

Quick honest question. If Greece does exit the euro wouldn't that mean a stronger euro by having a economic basket case like Greece leave? Does that then mean we could see PM price increase due to the strengthening of the euro against the dollar which is back by petrol which is falling in price?

Just trying to look at it logically from a macro view of events taking place.

Winston Churchill's picture

The French banking system collapse from GREXIT would not strengthen the euro.

Five8Charlie's picture

You Brits - so damned good with the understatement....

El Vaquero's picture

No, but it would be fantastic fodder for ZH. 

Looney's picture

Zactly, EV!  ;-)


Bossman1967's picture

So many abreviations I am so confused bottom line the FED will print and all will be as it has always been DOW up S&P record GLD and SLV in the shitter to make a lng story short untill the collapse have a great night bossman out

Looney's picture

+1967 !

...  to make a LNG story short ...

FRAUDian© slip? ;-)


HardlyZero's picture

Yes, long term, EU losing the entire southern flank (Greece, Italy, Spain, etc.) will be very good for the Euro.

But, between now and then, there will be massive loss of stabilitee and possibly global contagion.

Global contagion is why the CBs and TBTFs have been funded for 6 years going.

Global contagion is the 3rd-rail tipping point.

Joebloinvestor's picture

Greeks will fuck themselves.

Nepotism will still rule the day.

They will get from under the EU boot only to be slammed by bail ins.

MalteseFalcon's picture

Greece isn't leaving. unless Greece wants some turmoil.

It's nut cutting time.

Anyone who thinks that violence won't follow the failure of economic means clearly has not been paying attention.

Duc888's picture



Sell Greece more debt.  That should fix things.


Or not.


ebworthen's picture

There is no amount of taxpayer money or future generation debt too high for the ECB to steal to keep the pie-in-the-sky Euro/EU pipe dream alive while enriching the banksters of Brussels and Wall Street.

I think Greece should exit the Euro fantasy; but the ECB doesn't want the Euro to unravel so they will throw more money at them and drag this out. 

It's about the banks and corporations, not the citizens, so the people will be taxed and austerity-ized and put into debt until it all collapses.

Catalonia's picture

Greece IS leaving this time. And the empire is going to make an example of it, for Italy and Spain mainly. Greeks will be cast out like lepers

Peter Pan's picture

The man shown on the banknote is General Kolokotronis who was the greatest of Greek heroes in the 1821 uprising against the Ottoman Empire which led to Greek Independence.

He once said that the Greeks are crazy but they have a sane God. He also stated that God has signed for the freedom of Greece and he will not take back his signature.

The first saying remains true and it is the second saying which is being tested.

We all know that the Greeks have always defied their invaders and eventually won but if they lose this current challenge it will be a dangerous turn of events for humanity as a whole.

A small country, an insignicant economy but a pivotal nation when it comes to the freedom of thinking.

Their greatest challenge is not to leave the Euro but to have the discipline of a plan going forward which I cannot yet see. Their next greatest challenge will be to deal with a troublesome Turkey who will no doubt be encouraged to cause problems if not an actual disaster.

The big boys fear that Greece might be inspired by the defiant actions of the Icelanders who threw off the bankers yoke and they are terrified by the thought that if they succeed then Spain, Portugal and Italy will follow suit and leave Germany holding a bag full of vomit.

The only question is whether the next Greek government sells out its people once again.

falak pema's picture

no wonder the greek PM-to-be was not invited to Paris; solidarité oblige! 

If its the "other guy" who wins, he is worse than the plague; he is worse than Nutty and Abbas together for Hollande/Mutti.

He could blow up the Euro.

Even Al-Qaeda can't do that; only the banks and the statists! 

Not saying I agree with that logic; it's what it is.

Herdee's picture

Maybe all the rich French,Germans and Brits holding real estate that they bought up cheap in Greece should start thinking about all the extra taxes they might start paying soon.

Everybodys All American's picture

I can't see the ECB right now buying the bonds of the same countries who are threatening to leave. You talk about between a rock and a hard place. Think about the ECB banker ramifications of buying Greek bonds and then a few months later watching Greece exit the EURO. No ECB banker is going to watch or take the chance of that happening. So you can forget the ECB doing anything in the countries that desperately need QE.

Maybe that is why the ECB has never fully bought in to the QE the FED has served so completely in the US.

Shitgum Suicide's picture
Shitgum Suicide (not verified) Jan 11, 2015 6:44 PM

Also another question but not pertaining to Europe. By the price of oil collapsing could this not actually be the black swan that the price gets so low that the dollar finally goes of the petro dollar system and comes up the new one?
Could the SDR's actually be the new petro currency that the global carbon tax could be implemented via the IMF?

Sorry that's two questions.

Drummond's picture

How many currencies are linked into the SDR. I thought it was 4. The $€¥£. Can't see the Saudis buying that. Then again, if they don't tow the line then the missing pages of the 9/11 report might need to be released so we can invade them and take our, I mean their oil all for ourselves. And also that might take the building pressure off of Bush, Cheney, Wolfowitz, etc etc etc.

agent default's picture

Grexit would create too much turmoil and lead to loss of whatever control central banks have left.  Not happening.